Catholic hospital mega-merger could impact Northeast Ohio

FILE PHOTO

The Summa Health System campus in Akron.

Cincinnati-based Mercy Health, which has a peppered presence in northern Ohio, plans to merge with Maryland-based Bon Secours — a deal that once completed would create one of the largest health systems in the nation. The deal received little play in the media locally, but given Mercy's influence on the state level and its significant stake in Summa Health in Akron, it's time to pay attention.

Cincinnati-based Mercy Health — which has a peppered presence in northern Ohio with outposts in Youngstown, Lorain and Toledo — announced yesterday, Feb. 21, that it plans to merge with Maryland-based Bon Secours, a deal that once completed would create one of the largest health systems in the nation. The deal received little play in the media locally, but given Mercy's influence on the state level and significant stake in Summa Health in Akron, it's time to pay attention.

Here's some background, so bear with me.

In 2013, Mercy Health — then called Catholic Health Partners — acquired a 30% minority stake of Summa for $250 million. The 10-year-deal was technically completed through HealthSpan Partners, a non-religious subsidiary of Mercy. (The local bishop at the time wasn't too keen on a Catholic organization taking ownership in a secular health system.) The deal was designed to pump some much-needed cash into the Akron health system and improve its operating performance in four areas: billing, supply costs, productivity and length of stay.

Five years into the partnership, however, it's fair to say the deal hasn't worked out as planned. And with Mercy's newfound heft with Bon Secours — if merged, the system would boast $8 billion in annual operating revenue (that's on par with the Cleveland Clinic) — I wouldn't be surprised if the Catholic system pulled their money out of Summa and focused their efforts elsewhere.

Here's what's changed.

Leadership at Summa and Mercy has undergone seismic shifts since the deal was announced. Thomas Strauss, who launched Summa's quest for a minority investor, retired in 2014 (he now leads the Sisters of Charity Health System). A series of missteps under the watch of his successor, Tom Malone, further deteriorated Summa's bottom line.

Complicating matters further, the Clinic marched into Akron with what ultimately became a full-on takeover of Akron General, which, by all accounts, has been a success. Moreover, University Hospitals — the region's second largest system behind the Clinic — took over Portage County's Robinson Memorial Hospital, which previously had a relationship with Summa. Last summer, Summa's current leadership told Crain's the system has seen a 70% reduction in patients from Portage since UH took over Robinson.

Each day, from Mercy's perspective, this deal looks worse. In 2015, Mercy didn't earn a dime on its Summa investment, losing roughly $2.6 million, according to a recent disclosure made to bond holders on the Electronic Municipal Market Access website. In 2016, that figure rebounded to a $20.8 million, according to the filing. Last year's figures weren't available.

More importantly, however, the Summa deal just doesn't make sense with Mercy's current strategy.

When the deal was hatched, it was done so on the watch of Michael Connelly, who retired a little more than a year ago from Mercy. A significant piece of Mercy's aggressive Northeast Ohio play was in the insurance business. Mercy, through its HealthSpan arm, acquired the struggling Kaiser Permanente of Ohio operation in 2014. With that insurance piece and its partnering medical group plus Summa's capabilities as a major medical center, the Catholic health system believed it had quickly built an integrated network that could compete with UH and the Clinic.

However, the insurance business was a complete bust — and Mercy ran. It sold its individual and group insurance portfolios to Medical Mutual and dissolved its medical group. Many of those docs were hired by other systems, and MetroHealth brought many of the former HealthSpan facilities into its growing network. HealthSpan ceased local operations on Jan. 1, 2017.

Mercy's current CEO John Starcher is not interested in reviving the insurance business that had been bleeding money and threatening the health system's financial picture. HealthSpan's poor performance led Moody's Investors Service, for example, to assign a negative outlook to Mercy's bond rating. Moody's revised that outlook to stable following the "favorable outcome of the HealthSpan wind-down, which was quicker and less costly than expected."

So, what's this all mean for Summa?

That's a long-winded way of saying I doubt Mercy's top brass believes investment in Summa makes sense in the current health care environment. That's not great news for Summa, which continues to struggle.

According to a recent disclosure, Summa said its operating loss for the 12 months that ended Dec. 31 was $28 million — a considerable loss considering the health system's overall revenue is roughly $1.3 billion. Still, that loss isn't near the $60 million Summa leaders projected earlier in the year, so some progress is being made under interim CEO Cliff Deveny's watch.

Of course, there are about five years left under the original Mercy-Summa agreement, and anything could certainly happen, especially considering Summa is on the prowl for a permanent CEO.

Mercy holds five of the 16 seats on Summa's board, so the system still peddles considerable influence. Mercy maintained a low profile during Summa's recent administrative and financial turmoil. Last summer, a Mercy spokesperson told Crain's the health system was "not directly involved in the day-to-day operations" at Summa. Mentions of Mercy or HealthSpan have seemingly been scrubbed from Summa's website. Mercy's website, too, has few references to Summa, aside in the biography of Brian Smith, Mercy's chief operating officer whose portfolio includes overseeing the Summa relationship.

Summa has stressed its desire to maintain local control, but if Mercy backs out — and I expect they will — that leaves an opening for another health care giant to make a play in Akron. Who's interested?

Timothy Magaw is Crain's Cleveland Business' special sections editor. You can follow him on Twitter where he tweets about business, health care, politics and fatherhood.